Key992f - BUSINESS 702 MANAGERIAL ECONOMICS SECOND EXAM KEY...

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BUSINESS 702 SECOND EXAM KEY FALL 1999 MANAGERIAL ECONOMICS PLEDGE: "On my honor, I have neither given nor received any unauthorized aid on this exam, nor am I aware of anyone giving or receiving any unauthorized aid on this exam." ________________________________________ Signature ________________________________________ Name (Print) SHORT PROBLEMS (40 pts, 10pts each) 1. LP Basics (P9.1) . Indicate whether each of the following statements is true or false and explain why. A. Constant returns to scale and constant input prices are the only requirements for a total cost function to be linear. B. Changing input prices will always alter the slope of a given isocost line. C. In profit-maximization linear programming problems, negative values for slack variables imply that the amount of an input resource employed exceeds the amount available. D. Equal distances along a given process ray indicate equal output quantities. E. Nonbinding constraints are constraints that intersect at the optimum solution. SOLUTION A. True. Constant returns to scale, when coupled with constant input prices, will result in a linear total cost function.
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2 B. False. The slope of an isocost line is given by the ratio of input prices (e.g., Y = C 0 /P Y + (P X /P Y )X). Therefore, if all input prices rise or fall by a given percentage, due to economy-wide inflation or deflation, then the isocost line slope will be unaffected. C. True. Slack variables can never take on negative values. For example, in output, revenue, or profit maximization linear programming problems, this would imply that the amount of the resource used exceeds the amount available. Thus, slack variables are included in the general non-negativity requirements for all problems. D. True. Output along a given process ray increases proportionately with increases in the input factors. Therefore, equal distances along a given process ray indicate equal output quantities. E. False. Binding constraints are constraints that intersect at the optimum solution. 2. Production Function Concepts ( P7.2 ). Indicate whether each of the following statements is true or false. Explain your answers. A. Decreasing returns to scale and increasing average costs are indicated when e Q < 1. B. If the marginal product of capital falls as capital usage grows, the returns to capital are decreasing. C. L-shaped isoquants describe production systems in which inputs are perfect substitutes. D. Marginal revenue product measures the profit earned through expanding input usage. E. The marginal rate of technical substitution will be affected by a given percentage increase in the marginal productivity of all inputs. SOLUTION A. True. When e Q < 1, the percentage change in output is less than a given percentage change in all inputs. Thus, decreasing returns to scale and increasing average costs are indicated. B.
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This note was uploaded on 07/31/2011 for the course ECON 1201 taught by Professor Smith during the Spring '11 term at Waseda University.

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Key992f - BUSINESS 702 MANAGERIAL ECONOMICS SECOND EXAM KEY...

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